While lower gas prices and coal exports and strict environmental regulations have pummelled US coal players, Equity Watch can see hope on the horizon as the rise of gas will remove the oversupply of coal from the market, which will conversely be accompanied by higher gas prices.

Coal currently has a 30.1% share in the global energy portfolio and the Energy Information Administration’s latest quarterly forecast demand to keep growing to 2035 to eventually hold the second-highest share in said portfolio after oil.

The EIA’s quarterly revealed the extent to which US producers have been cutting their production in response to the weakness in the coal market. In Q4 2014, US coal production totalled 253 million short tonnes – roughly 1% lower compared to the previous quarter.

However, production for full year 2014 increased slightly as compared to full year production in 2013.

Coal producers have announced about 30 million tonnes of met coal supply cuts in recent quarters, which will be realised this year, as coal mines take some time to close operations, which makes supply rationalisation would portend well for US coal companies.

US coal companies will no doubt provide updates on the already announced supply cuts in their quarterlies this month, but Equity Watch said they could also announce incremental supply cuts to address the challenge of the oversupplied market.

“Any incremental supply cuts will positively affect the stock prices of coal companies,” Equity Watch said.

Last Friday Peabody president and CEO-Elect Glenn Kellow said that while the company had “made considerable strides in driving down costs, we know we have further work to do, and we are implementing a wide range of initiatives to provide sustainable results and generate shareholder value”

The company is also evaluating options at its highest cost operation, the Burton mine, where the current contract-miner agreement expires in mid-2016.

The EIA’s recent quarterly coal report revealed US coal exports had dropped by 1.6% in Q4 2014 quarter-on-quarter, which could be mainly attributed to a slowdown in global economic activity and rail issues in the US.

“Going forward, an improvement in rail issues in the US will portend well for US coal exports,” Equity Watch said.

The research house believes an important factor that led to the downturn of the coal market was the drop in natural gas prices, which encouraged electricity producers to reduce coal-fired electricity generation and increase natural gas-fired electricity generation.

However, the EIA estimates natural gas prices to increase from the current level of $US2.7/ million British thermal units to more than $3.5MMBtu by mid-2016.

“I believe the increase in natural gas prices will encourage coal-fired electricity generation, which will positively affect coal demand,” Equity Watch said.

“Coal-fired electricity in the US is expected to remain in a range of 36-38% in 2015 and 2016.

Peabody, Walter, Arch Coal and Alpha Natural resources have been making efforts to improve performance in the current coal market downturn, closing their high-cost mines, which will help lower costs.